Yellen Warns Against Rolling Back Dodd-Frank Reforms

Yellen's Future: I'm Staying, for Now

Yellen on the Election and December

The Market Has Already Priced in Yellen's Testimony

That Was Quick

And that's it. The hearing wraps up early, with Sen. Coats thanking Ms. Yellen for being the committee's "star witness" and Ms. Yellen thanking him for his kind words.

Ben Leubsdorf

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Yellen: Fed Not To Blame For Weak Business Investment

Ms. Yellen, toward the end of the hearing, said the Fed isn’t to blame for weak spending by U.S. companies and told lawmakers that she “wouldn’t agree that monetary policy has hampered business investment." While she described the short-term focus among firms making investment decisions as “disturbing,” she had no ready explanation for what’s causing their hesitation. One suggestion could be that the pace of technological change has diminished, she said.

Harriet Torry,

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How to Spread the Gains Around America

How do we get the economy delivering for a broader swath of Americans? Sen. Martin Heinrich (D., N.M.) raises one of the most important economic questions of the moment.

Ms. Yellen notes that productivity growth, which influences wage growth, "has been extremely disappointing over the last decade." The share of the economic pie going to labor (workers) vs. capital had been constant for a century, but then shifted more toward capital. That's not just in the U.S.

In recent years, Ms. Yellen says, "we're seeing a little bit of reversal" to that with a tight labor market and wages rising.

Income inequality is rising in part due to the loss of middle-income jobs in the face of technological change and globalization. "That was probably accelerated in the aftermath of the financial crisis," with people losing good jobs with good incomes. "We're seeing the frustration that comes with that."

With the nature of jobs changing, policy makers need to invest more in areas outside of monetary policy: training, education, safety nets and more.

Sudeep Reddy

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Taking Stock: No Surprises

Financial markets have taken Ms. Yellen's testimony in stride so far. U.S. stocks are trading in a narrow range, with the S&P 500 recently up 0.3% to 2183 and the Dow Jones Industrial Average down 2 points to 18867.

The dollar has edged higher today, and U.S. government bonds are down, continuing the trends that have been playing out since the presidential election. Gold is up slightly.

Put it together, and it's an indication that traders are hearing nothing surprising from Ms. Yellen about the pace of future interest-rate increases.

Erik Holm

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'Stress Test' Transparency

Further concerns are being raised by the panel on the Fed’s yearly stress test exercise. Republican Sen. Mike Lee of Utah questioned the lack of transparency in the central bank’s supervisory process, which he described as a “black box.”

Ms. Yellen said while the Fed doesn’t publish its mathematical formula, regulators have provided the industry with a “great deal of information about the models” it uses. She said the Fed wants banks to have “sound risk management” practices and “develop their own capacity to evaluate risks in their own portfolios” rather than handing them a model.

Boosting Wages

Sen. Bob Casey (D., Pa.) notes the weak performance for wage growth in recent years, and asks Ms. Yellen for advice on how to boost pay in the short and long run.

Ms. Yellen said that it’s not a new phenomenon, with globalization and technological change playing roles over time. Those forces may be good for the economy as a whole, she said, but there are individuals who don’t benefit and policies should be directed to help them. There are many possible options, she said, though no foolproof simple solutions.

Still, as she noted in her prepared testimony, there is evidence that in the short run, a tightening job market is boosting wage growth out of its postrecession rut.

Ben Leubsdorf

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Cybersecurity on the Mind

Sen. Gary Peters (D., Mich.) has some concerns about cybersecurity. What is the Fed doing about it, he asks?

Calling it "one of the most significant risks our country faces,” Ms. Yellen said the Fed is cooperating with other agencies and other nations to ensure the financial system is prepared. U.S. regulators unveiled a plan last month on protecting big banks and Ms. Yellen also noted the Fed’s efforts to improve its own systems.

The GAO's review found the Fed could do a better job evaluating the tests’ impact on credit in the economy. The report also recommended the central bank to be more transparent about the reasons banks fail the tests and improve its oversight of the mathematical models used in the program.

Ms. Yellen said the review offered some “useful” recommendations, which the Fed has either “already considered” or is currently “underway.” “Their suggestions are useful and we intend to look at it carefully,” she said.

Donna Borak

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Traders work on the floor of the New York Stock Exchange as Janet Yellen speaks to lawmakers. Justin Lane/European Pressphoto Agency

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Yellen Talks Up Fed Independence, Dual Mandate

Sen. Amy Klobuchar (D., Minn.) gives Ms. Yellen an opening to talk up the importance of the Fed’s independence.

“Thank you for that question,” Ms. Yellen said, before launching into her oft-repeated argument that central banks are more effective when they can make tactical decisions free of political pressure. A compromised central bank, she warns, can lead to high inflation or even hyperinflation.

She also defended the Fed’s dual mandate – maximum employment and stable prices – as comprising two things that “matter greatly to the American people.” While those two goals could be in conflict in some situations, she added, they’re usually not.

“I wouldn’t want to see the clock turned back” on those regulations, she said. New capital and liquidity rules, the ability for policy makers to monitor risks to the financial system, have been critical in making “our financial system safer and sounder.”

Gary Cameron/Reuters

Donna Borak

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Fiscal Uncertainty for a 'Considerable Time'

Ms. Yellen notes how markets have been moving based on anticipation of a major fiscal package. And that could influence how quickly the Fed reaches its mandate on inflation.

She obviously recognizes we don't know what this will look like in the coming months under a new president and Congress. "We don't know what's going to happen. There's a great deal of uncertainty," she says.

The Fed will be watching Congress's decisions and shifts in the economic outlook based on policy. "Uncertainty about these matters will last for some considerable time."

Still, that doesn't seem to be moving her from the current path for rate increases (that is, December rate increase).

Janet Yellen Offers Advice on Fiscal Policy

Ms. Yellen was careful to note that considering the “costs and benefits” of various fiscal policy proposals is the purview of “Congress and the administration.” Still, she said she would recommend keeping a few things in mind.

First off, it’s not 2009 anymore. “The economy is operating relatively close to full employment at this point,” she said, unlike the immediate aftermath of the financial crisis.

And don't forget about the deficit: “CBO’s assessment, as you know, is that there are longer-term fiscal challenges, that the debt-to-GDP ratio at this point looks likely to rise as the baby boomers retire and population aging occurs, and that longer-run deficit problem needs to be kept in mind,” she said.

Also, keep in mind that the U.S. economy might need stimulus if it runs into trouble. “With the debt-to-GDP ratio at around 77%, there’s not a lot of fiscal space should a shock to the economy occur, an adverse shock that did require fiscal stimulus,” she said.

And noting the weak productivity growth of recent years, Ms. Yellen concluded: “My advice would be, as you consider fiscal policies, to keep in mind and look carefully at the impact those policies are likely to have on the economy’s productive capacity, on productivity growth, and to the maximum extent possible choose policies that would improve that long-run growth and productivity outlook.”

Ben Leubsdorf

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Yellen's Future: I'm Staying, for Now

Any reason Ms. Yellen won't serve out her term as chair? Rep. Carolyn Maloney (D., N.Y.) asks the key question about the Fed boss's future.

"No, I cannot," she says. Her four-year term ends in January 2018, "and it is fully my intention to serve out my term."

Sudeep Reddy

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Yellen on the Election and December

First up for the Q&A segment of today’s hearing: Mr. Coats, the Joint Economic Committee’s chairman and outgoing Republican senator from Indiana.

He asks a question on everyone’s mind: Did the election outcome affect the case for a December rate hike?

Ms. Yellen said the economic data since the Fed’s November meeting – which was the week before the vote – has been consistent with economic progress that would reinforce the case for a rate increase soon. Economic policies pursued by the new administration and Congress could affect the Fed’s outlook, she said, but only as those come into focus.

Susan Walsh/Associated Press

Ben Leubsdorf

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Sides of the Aisle

The only Republicans at the hearing: Chairman Dan Coats and Vice Chairman Pat Tiberi. On the other side, seven Democrats are eagerly waiting to ask questions.

Kate Davidson

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Reading the 'Tea Leaves' of the Economy

New York Democrat Rep. Carolyn Maloney pointedly asked Ms. Yellen how she plans to steer the central bank in the days ahead following the results of the Nov. 8 election. “Our world has been turned upside down,” she said.

Ms. Maloney warned the results of the election could have a direct effect on the Fed given persistent congressional threats to restrict its independence and conflicting statements by President-elect Donald Trump. His comments, she said, “have been somewhat contradictory—he stated both that the current low interest rates are good for the economy and the Fed was playing politics by keeping them at these levels.”

Members on both sides of the aisle are concerned that despite improved performance by the economy, challenges will persist for the incoming administration. "While we have seen some encouraging metrics of economic performance over the past year, the next Congress and the next administration will still face a number of challenges," said Dan Coats, (R., Ind.) chairman of the committee.

The Market Has Already Priced in Yellen's Testimony

Equities aren't moving much as Janet Yellen trudges from the Eccles Building across the Mall to Capitol Hill. Then again, the market pretty much already knows what she's going to say. Fed-fund futures—the best gauge of where the market thinks interest rates are headed—carry a 91% probability that the Fed raises rates by December. Unless Ms. Yellen says something that contradicts the Fed's talking points since the November FOMC meeting, the market has already priced in her testimony.

The Dow Jones Industrial Average is up 21 points, the S&P 500 is up 6 points, and the Nasdaq Composite is up 11 points as well. A burst of data on consumer prices, jobless claims, residential construction, and the Philly Fed's monthly business survey were all generally positive, but didn't move equities.

Elsewhere, bond yields are churning. The yield on the U.S. 10-year Treasury note is up to 2.25%, and while that's up a bit on the morning, it is down from yesterday morning's high of 2.28%.

Crude oil is rising, amid talk of an OPEC deal. Nymex crude is up 2% at $46.44, and Brent crude is up 2%, too, at $47.54.

The dollar is essentially flat with the euro, and up against the yen. The WSJ Dollar Index is up 0.01%.